Legislative Intent Behind Dodd-Frank Section 953
While, on its face, this section may seem to add be a noble measure of transparency to a corporate world filled with executive excess and greed, in actuality, this measure is misplaced and ineffective. That is to say, in order for this transparency in executive compensation to work in creating “outrage” sufficient to demand change by the investors who receive these clear graphics of CEO to Employee pay ratios, one would have to operate on the assumption that the type of “average investor” (who would assumedly react poorly to the gross discrepancy in pay that is sure to be disseminated in these disclosures) has any measure of say/input into how an executive is compensated. While it may be true that with each shareholder’s equity investment there comes a right to vote, the staggering ratio in shareholder votes of institutional investors to “average/individual shareholders” decimates the premise of this assumption.
Institutional investors, who may not be as off-put at high executive pay – even when disclosed in conjunction with median employee pay or “performance” numbers that show a drop in share value – are not likely to create an uproar in management by insisting on lower compensation figures for those executives. If the “performance” numbers are not pleasing to the investor, it is that poor performance itself, not the compensation that was granted concomitant with it, which will initiate the need for a change in management. Furthermore, institutional investors are more apt to understand that high compensation for a CEO paired with a drop in “performance” and thereby, share-values, may be more attributable to systemic issues throughout the market that have nothing to do with the effectiveness or competency of the highly-compensated executive at the issuer’s helm. Assuming the issuing company in question does not operate in dying sector of the market (like an outdated technology) and is not being effected by a larger, systemic risk problem, it is likely the drop in share-value is the result of tight competition in that specific sector. That is, the zero-sum transaction is losing market-share to a close (and assumedly, similar) competitor. It is precisely at such a time – when competition is tight and share-values are dropping – that a shareholder needs the caliber of executive who can demand such high compensation figures to raise revenues amidst a competitive market. Again, should the executive fail to raise revenues and improve the situation over a certain period of quarters, it is the poor performance in itself, not the compensation he received, that will signal the need for a changing of the guard.
The drafters of this Act further made clear that executive compensation disclosure is extremely important subject matter (despite the short overall length of Subtitle E) by requiring that these figures be disclosed “in any filing of the issuer described in section 229.10(a) of title 17, Code of Federal Regulations (or any successor thereto)”. In requiring such broad applicability, the drafters are essentially saying that this information needs to be clearly and readily available on any filing document made at any time by the issuing company. Again, this seems to be another misdiagnosis by the drafters – this time, in the form of “overkill”. Whatever effect the clear disclosure of executive compensation might have on public companies (be that the intended effect or not) it certainly will not be more or less likely to occur by endlessly repeating the disclosure on every SEC document.